HIDDEN COSTS Export financing can pay for itself in countries where the export climate is favorable. In some countries such as China, where the economics currently work against U.S. exporters. U.S. exporters are at a disadvantage.

International expansion offers new markets for your products. How to enter those markets is one key to your success.

There are seven basic approaches to reaching new foreign customers, each offering advantages and disadvantages: ecommerce; distributors; strategic alliances; licensing; new foreign office; joint venture; and acquisition. In this article, we look at using strategic alliances.

What’s a Strategic Alliance?

An alliance is a contract between two companies to cooperate to achieve a common purpose. Alliance partners are not competitors, but have similar or complimentary products or services, and/or operate in different geographies. The partners share costs and expertise, and leverage each other’s customer bases, thus minimizing investment. Partners can also help position your products to have more local appeal.

There are many types of alliances, but two common ones for international expansion are: (1) sales agents (or manufacturer’s reps), and (2) referral partners.

Sales agents. In this model, you partner with a local individual or company (the sales agent) to find customers and close sales. You sell directly to those customers and pay the agent a commission based on the sales they generate.

To be successful, your agents must have the right customer base, understand your products, and be sufficiently motivated. Typically, this works when your products naturally complement those the agent is already promoting to his/her customers. Agents generally don’t get paid until sales are made, so they won’t invest much time unless they are confident they can sell your products.

It can be challenging to find the right agent. They are the face of your brand locally, and their business practices may be different from yours. Suppliers must fully support the agent much as they would an employee. They must be prepared to sell directly to foreign customers, which requires excellent communication and logistics, knowledge of taxes and duties, local credit, currency exchange, and payment terms (or have financial partners to help), and the ability to provide customer service in different countries and languages.

Referral partners. In this model, you forward sales leads in countries you cannot serve to a partner who can handle them, in exchange for an agreed referral fee. This allows you to meet your customers’ international needs when they otherwise might go elsewhere, and to collect some revenue on the sales. Even better are mutually beneficial alliances where your partner similarly refers customers to you when there are leads in your markets.

These relationships can be implemented quickly. They often involve co-branding, so that both companies get more market recognition. The best ones pool expertise and talent, and foster creative solutions and new offerings.

A classic example is United Airlines’ Star Alliance. Each alliance member remains a separate company, but through agreement can serve a larger, combined base of customers more effectively than any operating individually.

However, many alliances fail to deliver as expected. They are challenging to execute domestically, and the degree of difficulty multiplies in cross-border settings.

Successful alliances depend on finding like-minded partners, necessitating careful planning and due diligence, as well as excellent partnering skills. Disconnects in expectations and company cultures are common.

Control may be limited. Your reputation and brand are tied to your partner, so failing to consider the business practices of a potential partner can be costly, if not disastrous. Margins are often small, and therefore, often a disincentive to invest in the relationship or have patience for long-term results, and since little is invested, it’s easy to disengage. While generally easy to exit, termination can produce a new competitor.

Are Strategic Alliances Right for You?

Local agents can make sense if you have very expensive or custom-made products, or your items have a very short shelf life, since distributors may not find them cost-effective to purchase and support.

Consider referral partners if you find a like-minded company in different geographies than your company.

In summary, alliances offer relatively low investment and quick access to new customers. Success requires finding the right partners, excellent partnering skills, significant time investments, and a longer-term dedication to the strategy to achieve best results.

In the next article, we’ll look at licensing as a way to reach new international customers.

Doris Nagel is CEO of Globalocity, and has over 25 years of hands-on global experience, focusing on strategic partnering, indirect sales channel management, and market entry. She’s a frequent speaker and author, and is currently working on a book on international distributor networks. Check out Globalocity’s free infographic summarizing the seven international expansion models discussed in this series.